USA – WASHINGTON, DC Trends and Developments Contributed by: Nicholas S. Johnson, Jonathan S. Deem, Jennifer S. Fahey and Japera A. Parker, Bailey & Glasser, LLP
and an honest assessment of likely regulatory out - comes. Outside dates and extension mechanisms The outside date – the date after which either party may terminate the merger agreement if closing has not occurred – is the primary clock mechanism by which the parties allocate the risk of regulatory delay. Setting the initial outside date Setting the initial outside date requires a realistic assessment of the anticipated regulatory timeline, including the following:
the completion of a CFIUS review or the receipt of a Second Request response) have been achieved by specified dates. This asymmetric structure creates interim checkpoints that provide sellers with mean - ingful opportunities to assess deal progress and, if warranted, to negotiate enhanced deal protection. Regulatory efforts covenants and hell-or-high- water commitments Perhaps the most consequential and heavily litigated provision in deals with significant regulatory risk is the regulatory efforts covenant – the buyer’s affirmative obligation to pursue regulatory approvals with speci - fied levels of diligence and commitment. Spectrum of efforts standards Regulatory efforts covenants exist on a spectrum from “reasonable efforts” – the lowest standard, requiring the buyer to take efforts that a reasonable party would undertake – to “best efforts” – a more demanding standard requiring the buyer to take all steps within its power to achieve the required approvals – to “hell-or- high-water” – the most demanding standard, explicitly requiring the buyer to agree to whatever divestitures or other remedies are required to obtain regulatory clearances, regardless of cost or commercial impact. The choice of standard is not merely semantic. In liti - gation arising from failed regulatory deals, the scope of the buyer’s efforts covenant has been the central battleground. Courts have generally been reluctant to find that buyers with less than hell-or-high-water com - mitments were obligated to agree to divestitures that the buyer judged commercially unacceptable. Con - versely, buyers that have accepted hell-or-high-water language have been held to that standard even when regulatory outcomes were far more burdensome than anticipated at signing. Hell-or-high-water provisions: scope and carve-outs While hell-or-high-water language is increasingly common in large transactions with significant antitrust exposure, parties routinely negotiate carve-outs and limitations on even the broadest efforts commitments. Common carve-outs include: • exclusions from the obligation to divest specified “crown jewel” assets or businesses;
• time for HSR filing and waiting periods; • potential Second Request timelines; • CFIUS review and investigation timelines; • sector-specific approval timelines; and • foreign competition filing timelines.
In straightforward transactions, an outside date of 12 months from signing may be adequate. In complex transactions with significant antitrust risk or CFIUS exposure, initial outside dates of 18 months or longer have become increasingly common. Extension rights Most merger agreements today include one or more automatic or elective extension provisions that extend the outside date if specified regulatory conditions have not yet been satisfied. The structure of these exten - sions is a heavily negotiated point. Automatic exten - sions typically trigger if certain regulatory approvals are still pending as of the initial outside date, without requiring any party election. Elective extensions may require the buyer to affirmatively elect to extend and may be conditioned on the buyer’s compliance with its regulatory efforts covenant as of the election date. Some agreements provide that elective extensions require the payment of an extension fee by the buyer – effectively a partial payment of the reverse termina - tion fee as consideration for additional time. Asymmetric extension rights In transactions with significant regulatory risk, sell - ers sometimes negotiate for asymmetric extension rights – for example, the right to extend the outside date only if specified regulatory milestones (such as
1444 CHAMBERS.COM
Powered by FlippingBook